Union Now: The Changing Picture of Credit Unions and the Banking Industry

(10/30/2012) As news of the federal government’s suit against Bank of America surfaced last week, it was yet another headline chronicling the struggles and even failures of the banking industry.

But just a few days before on October 18, International Credit Union Day called attention to a less publicized financial success.

What are credit unions, and how do recent trends point the way towards a major shift in the world of banking?

A Snapshot of Credit Unions

Credit unions were formed as far back as the beginning of the 19th century in England, and spread throughout the world. Today credit unions are posting record membership. Overall, 92 million U.S. consumers are members of credit unions, electing to obtain all or some of their financial services from over 8,200 credit unions. Outside the U.S., credit unions exist in 100 countries and serve more than 196 million people.

The purpose of credit unions today is the same as they were in the beginning, with the twists of modernity. Credit unions are non-profit financial cooperatives for members with a key similarity, whether it’s employment, association, or residence area. Since they are not for profit, credit unions offer more affordable access to credit and savings services, providing attractive savings and loan rates along with low or no banking fees. For these reasons, credit unions are often top on the list of financial institutions in consumer satisfaction.

Besides their purpose, credit unions are also unique due to their organization and structure. Credits unions are democratically owned and controlled, meaning their boards of directors are made up of members elected by other members. There are no external stakeholders involved. Every member has an equal vote, no matter the value of assets in the union. Directors are volunteers, as are most other people involved in the credit union.

Credit unions offer the same services as regular banks — checking accounts, savings, certificates of deposit, credit and debit cards, retirement accounts, and lending programs for homes, businesses and education. Due to this, credit unions are also regulated like banks. Federally chartered credit unions are regulated by the National Credit Union Administration (NCUA), an independent agency, and state chartered credit unions are regulated by their state credit union department.

Due to all these factors, credit unions were able to weather many economic downturns in the last few decades, and even sidestep many of the problems associated with the subprime crisis and bank fallout of recent years.

The Developing Picture of Credit Unions

While credit unions have in many cases distanced themselves from regular financial institutions and banks, they are finding themselves experiencing some key seismic shifts.

Mirroring a trend among regular banks, many smaller credit unions are folding. The total number of credit unions fell 3.5 percent from 2010 to 2011, according to the World Council of Credit Unions’ 2011 Statistical Report. Hardest hit are those with less than $10 million in assets. Put another way, in 2007, there were 8,332 credit unions. Today, there are only 7,165, an average loss of 233 credit unions per year and a little less than one per day.

Smaller credit unions have found their capital, loans, loan originations, and income declining. This combined with record drops in loan rates have reduced loan and investment income. The main sources of noninterest income are courtesy pay, debit and credit card interchange and commissions for selling real estate loans to the secondary market. Smaller credit unions have less recourse to these sources of income in comparison to larger credit unions.

“In the past, credit unions simply required a branch or two, a core banking system, and an ATM,” says Bart Narter, senior vice president of Celent’s Banking Group, in their report, Tipping Scale: Credit Union Consolidation. “In the past 10 years, Internet banking, bill pay, know your customer, and Office of Foreign Assets Control (OFAC) compliance are table stakes. Going forward, competition will be driven by demand for mobile banking, consumer and business remote deposit capture, and branch capture.”

As a result, smaller credit unions can’t keep up. They’re failing, or are merging to form larger institutions.

“In countries around the world, smaller credit unions are merging to realize greater economies of scale and develop capabilities to deliver more services to members,” said Brian Branch, president/CEO for the World Council, in their report.

But at the same time as this decline of smaller credit unions, the overall picture for credit unions is one of dramatic growth. In 2007, credit unions collectively held $760.9 billion in assets. By 2012, that number had reached over $1 trillion. In terms of revenue, an industry research report from IBIS World expects credit unions to hit $54.2 billion in the next five years, a growth of 3.1 percent per year on average.

The bigger story is the growth in membership. According to the World Council, 8 million new members joined credit unions across the world in 2011. The total number of credit union members has hit 196 million in 100 reporting countries. The average annual increase is around 1.5 percent, with 2012 seeing the largest bump of 1.5 million new.

This growth is only expected to continue in future years. By 2032, credit unions will hit 126.2 million members in the U.S.. That would mean one in every three people in the U.S. would belong to a credit union.

“The dramatic upturn in the number of members shows that credit unions are becoming more influential, and consumers are finding them to be better alternatives than many for-profit financial institutions,” said Branch in a statement.

A major factor in the growth of credit union members? Dissatisfaction with other financial institutions. In fact, the final quarter of 2011 saw a major spike with Bank Transfer Day and other efforts, encouraging customers to look for alternatives to big banks. At the time, news of new and higher fees at many banks for regular checking and savings services pushed many over the edge.

The Future

The statistics point towards a growing shift in banking. As more and more people look to credit unions for their financial services, credit unions merge and grow in size, and regular banks disappoint, the future may be one dominated by a new force in banking.





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